Risks to the stock market: Why falling inflation should worry investors

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• Inflation is falling
• Experts are not giving the all-clear for the stock markets
• Threatens one deflation?

2022 will go down in history as the year with record inflation in Germany. Sharply increased prices for energy and food had driven inflation to 7.9 percent on average for the year. In the meantime, the value had even been significantly higher: In October and November 2022, inflation rates of over 10 percent were reported.

Easing on the inflation front

At the end of the year, however, the situation on the inflation front eased somewhat: the rise in prices slowed down significantly, and in December consumer prices were still 8.6 percent above the level of the same month last year. Despite recent signs of relaxation, experts warn against giving the all-clear on inflation in this country. Dekabank chief economist Ulrich Kater only sees this as an “intermediate low”: “It will take at best one to two years before we have proper price stability again,” dpa quoted the expert as saying.

Market observers are much more optimistic about the inflation situation in the United States. Here, consumer price inflation had already peaked in June, when the inflation rate climbed to 9.1 percent. Since then, consumer price inflation has continued to slow steadily, with December consumer prices down 0.1 percent month-on-month and up 6.5 percent year-on-year. Here, too, it cannot be assumed that inflation rates will fall to the target of an average of two percent aimed for by the US Federal Reserve in the very near future, but experts nevertheless assume that inflation will continue to decline: “Inflation rates will increase over the coming The trend will continue to fall for months. It will initially go relatively quickly to around 4 percent. Above all, the expected lower increase in rents will push inflation rates down considerably. The topic of inflation is therefore less explosive and the Fed can continue with it down a gear,” Dow Jones quotes Thomas Gitzel, chief economist at VP Bank, as saying.

Risks for the stock markets are increasing

But while falling inflation rates are generally good news for consumers, stock markets may face a new risk. Weak demand has recently forced the first companies to make price corrections. One of the most prominent examples in this context is the electric car manufacturer Tesla. The US company was recently forced to lower prices in the important Chinese market. One of the reasons for this is the strong competition in this sales market. Buying a Tesla car will also be cheaper for European customers: Depending on the configuration, customers in Germany will then have to pay between one and 17 percent less for the Model 3 sedan and the worldwide Tesla bestseller Model Y.

In addition to the increasing competition, it should also be the weakening demand that forced the e-car group to take this step. The delivery figures in December had already raised concerns that the vehicles might no longer be in demand among potential electric car buyers: “We believe that Tesla is facing a significant demand problem,” wrote Bernstein analyst Toni Sacconaghi.

Prices have not only fallen recently at Tesla, prices are also declining on the raw materials market: After some new highs in 2022, steel, aluminum and oil now cost significantly less.

However, this has not yet had any consequences on the labor market, which is still proving to be quite robust. On the contrary: wages are not falling, many jobs in this country and in the USA are still vacant, and the shortage of skilled workers is still acute. The combination of falling product prices and a strong labor market is not good news for investors, as companies have to pay more for workers but get less for what they sell. Profit margins ‘will fall’ […]”It’s a fact,” Barron’s quotes Brian Rauscher, Fundstrat’s head of global portfolio strategy.

In turn, falling profit margins are bad news for investors. “Going forward there will be an issue of pricing power… [bevorzugen Sie also] Firms with tighter margins,” Rauscher continues. He’s talking in particular about those companies that are still able to push through price increases, cut costs effectively, or even do both.

Is deflation imminent?

So is the economy slipping from inflation to deflation? In 2023, instead of higher consumer prices, will consumers and investors see the opposite and money appreciate while prices of goods and services fall? The consequences – especially for the stock markets – would be devastating. The monetary watchdogs could then end their policy of interest rate hikes and possibly even lower the key interest rates again, which would help those companies in particular that are heavily leveraged. At the same time, however, there would be an economic downturn and rising unemployment figures, and defaults on loans are also common in deflationary times.

The first market experts are already warning of inflation turning into deflation: “It’s time to utter the ‘D’ word in polite circles. Apparently that’s decidedly contrary, for current reasons I suppose. I can’t for Talking about 2024, but as for 2023, we could very well see a surprise CPI deflation,” Markets Insider quoted Jeff Weniger, Head of Equities at WisdomTree.

Colleague Ryan Detrick, Carson Group’s chief market strategist, backs this assessment to the portal: “The truth is that virtually nobody expects deflation, but 18 months ago today nobody expected inflation at 9% either”. Although Detrick does not assume that “complete deflation” is to be expected, a very rapid fall in inflation is likely. “We’d rather call it disinflation than deflation, but the truth is the patient is currently getting a lot of medicine and now that China is reopening and supply chains are getting back on track, many of the big headwinds are disappearing and opening the door to much lower prices “.

With this in mind, investors should prepare for all options. Rauscher recommends looking at higher-quality companies with better balance sheets and strong management teams. This strategy should be worthwhile in any market, but especially when prices are falling.

Editorial office finanzen.net

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